Full Bailout Could Cost $3 Trillion

As the Treasury prepares to inject $250 billion into the U.S. financial system, ABC News spoke to market analyst Barry Ritholtz about the bailout. He favours the whole “give banks money” approach that the UK took last week and the U.S. adopted Monday. But he warns that the price to fully resolve this current crisis could reach $3 trillion. Get your checkbooks out, taxpayers!

ABC News: The most fundamental underlying problem is that banks are undercapitalized. This is at a corporate, governance, structural level. I don’t mean the balance sheets, I don’t mean how much money they have in their trading accounts, I mean on a fundamental basis of shareholders’ equity versus liability. They don’t have enough cash. They don’t have enough capital. The way you get enough capital in these situations is what Warren Buffett did with GE and Goldman Sachs, and it’s what the Swedes did during their crisis in the ’90s and it is what Gordon Brown has proposed last week…

Remember Ben Bernanke’s helicopter speech? [He said] we have technology and it’s called a printing press … and if we have to, we can drop money from the sky. …There is no free lunch, you can run the printing press all day long, and you run into a dollar devaluation issue and a potential down the road inflation issue. But you know, you’re choosing between less worse options.

With certain things, sometimes the choice is between two bad options and in this case, the bad options are do we let the whole system go to hell in a handbasket or do we cause a little dollar deflation and a little systemic inflation in order to genuinely avoid systemic risk?

Every past bailout we’ve seen, for the most of this past year, they’ve all cost more than originally thought. AIG is something like $135 billion already. That was supposed to be $85 billion. This [$700 billion package] is a start. My best guess is by the time we’re done, it’ll be between $2 trillion and $3 trillion.